Monday, January 31, 2011

America's Poorest 5% = India's Richest 5%

Catherine Rampell features the chart above today on the Economix blog, taken from a new book "The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality" by Branko Milanovic. The chart shows the relationship between a) the distribution of income by "ventiles" (5% groups) for the U.S., Brazil, China and India on the horizontal axis and b) the percentile of world income distribution on the vertical axis. As Catherine comments:

"Notice how the entire line for the United States resides in the top portion of the graph? That’s because the entire country is relatively rich. In fact, America’s bottom ventile is still richer than most of the world: That is, the typical person in the bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants (see dashed line in graph).

Now check out the line for India. India’s poorest ventile corresponds with the 4th poorest percentile worldwide. And its richest? The 68th percentile. Yes, that’s right: America’s poorest are, as a group, about as rich as India’s richest. Kind of blows your mind, right?"

MP: Yes, and shouldn't it also blow away a lot of our misguided concern about rising income inequality in the U.S.?

"You say that it is your custom to burn widows. Very well. We also have a custom: when men burn a woman alive, we tie a rope around their necks and we hang them. Build your funeral pyre; then beside it, my carpenters will build a gallows. You may follow your custom. And then we will follow ours." -- Sir Charles James Napier, the British Army's Commander-in-Chief in India, 1842 - 1853

Yes, it is mind blowing. Our poorest are as wealthy as their richest. Now we can all understand why Obama and the Democrats want to "fundamentally transform the United States of America." The U.S. stands as a real world refutation of all the marxist dogma that they have spewed and continue to spew. Income inequality can only be eliminated by undermining individual potential. We'll be equal alright, equally poor.

One of the major reasons for the "gap between rich and poor here" is the massive influx of third world immigrants. I'm wondering, does that immigration help to reduce the nasty " world wide gap"? Should we shut down immigration in order to reduce the gap to a level more comfortable to the left?

"Poverty in the United States, in an absolute sense, has virtually disappeared. Today, there's nothing remotely resembling poverty of yesteryear. However, if poverty is defined in the relative sense, the lowest fifth of income-earners, "poverty" will always be with us. No matter how poverty is defined, if I were an unborn spirit, condemned to a life of poverty, but God allowed me to choose which nation I wanted to be poor in, I'd choose the United States. Our poor must be the envy of the world's poor." -- Walter Williams

I have no interest in social justice which is a polite term for confiscation and redistribution of wealth. I oppose such policies when wealth is taken from the rich and given to the poor and I oppose such policies when it is wealth taken from the poor and given to the rich. I oppose confiscation and redistribution when it is the form of Obamacare or a tax system that allows General Electric to pay no taxes at all and get a bailout to boot. I submit to you that in our time the major wealth redistribution is from the poor or at least less well off to the rich. When the Fed sets interest rates as low as they are it is transferring wealth from the relatively poor savers to the relatively rich. When the government gives free access to US markets for products outsourced then it is transferring wealth from the workers in the closed factories to Wall Street. When government grants green cards and temporary work visas it is allowing employers to pay workers less by increasing the supply and thus reducing the price and transferring wealth to the rich.

That our poor are doing better than India’s rich is very interesting as are the comparisons with Sweden. But using this as a reason not to be concerned about rising income inequality in the US strikes me as ivory tower arrogance, elitism, and lacking any sense of moral responsibility or social conscience. When God asked Cain where his brother Abel was Cain answered: I know not; am I my brother’s keeper. When free traders are asked where the jobs are they answer I know not; the jobless are better off than the Indians absolving themselves of any responsibility for increasing income inequality.

"No. How rich anybody else is says nothing about the gap between rich and poor here. It only says the world wide gap is even larger."

Do you mean the fact that the poorest 5% in the US are richer than 2/3 of the rest of the world doesn't say something pretty important about the relatively free market capitalist system we have here? Do you think the gap between rich and poor in this country is a more important point? Your class envy is just downright silly.

Do you think your buddy in the White House should work harder to "spread the wealth"?

"When my grandfather had hired help, neither had a TV, and both kept warm by a wood stove. Grandpa was wealthier than the help, but not like today."

Yes. And now, both you and the hired help have multiple TVs, and you both keep warm using a thermostatically controlled central heating system that burns gas. You are wealthier than the hired help, due in part to the efforts of your grandfather. What is your point here?

"Just because the US poor have as much income as India's rich, doesn't mean their QoL is equal.

Yes it does; did you read the NYT article referenced by this post? It includes the following explanation for the chart:

"The household income numbers are all converted into international dollars adjusted for equal purchasing power, since the cost of goods varies from country to country. In other words, the chart adjusts for the cost of living in different countries, so we are looking at consistent living standards worldwide."

"Also, the chart is measured in percentiles, so the difference between the world's 70% and 100% could be (and is) drastic."

When government grants green cards and temporary work visas it is allowing employers to pay workers less ...

Do you know how many businesses in the U.S. are created every year by immigrants from places like Israel and India? Take a tour of Silicon Valley. And when the reality of just who is creating high quality U.S. jobs hits you, maybe you'll develop a sense of humility.

When free traders are asked where the jobs are they answer I know not ...

Wow. That's quite a statement of responsibility. Or, should I say entitlement. Just how many high quality jobs have you created for your brothers? I'm sure that someone with your "sense of moral responsibility and social conscience" will not rest until you've lived up to that divine charge. Of course, others may have to weigh sending some jobs overseas in order to save or create others, but I'm sure that by your example you'll set them straight.

I'm curious though, what about all of your brothers in the U.S. who work for companies like Toyota, VW, BASF, Nissan, Nestle, Haier and Tata Group? Almost four percent of all U.S. workers are employed by foreign firms. Are they contributing to rising income inequality somewhere else? Would quitting those jobs be the moral thing to do?

Ha! C'mon now, does anybody here honestly believe, with a straight face, that, "America’s poorest are as rich as India’s richest." Think about that for more than five seconds. One has to wonder to what extent this piece of "research" has undergone any rigorous, objective peer scrutiny.

Nothing in that piece negates the hard statistics that document the significant shifting of wealth to the top that has been occurring domestically.

Most of Indian 'middle class' earns between Rs 1000-2000The Times of IndiaAug 22, 2010

NEW DELHI: Despite its shaky empirical foundations, the myth of the Great Indian Middle Class persists. A new Asian Development Bank report lauds the rise of the Indian middle class and projects it as the engine of global growth. However, according to the definition used in the report itself, the vast majority of this middle class earns between Rs 1,000 and Rs 2,000 per person per month. Only 0.0009% of Indians earn more than Rs 10,000 per month.

The ADB report defines the middle class as those earning between $2 and $20 per person per day, measured in international dollars, ie adjusted for purchasing power parity. The ADB does add further nuance by splitting the middle class into three sub-sections: lower middle class ($2 - $4), middle middle ($4 - $10) and upper middle ($10 - $20).

Since $1 PPP is Rs 17.256, this means that the vast majority of the Indian middle class earns between Rs 1035 and Rs 2070.

Wow, I usually don't click through on nytimes links, but the idiocy of the commenters there is breathtaking. I see some dumb comments on economics blogs like this one, but I guess I've been shielded so far from the intense stupidity that's out there in NYT lala land.

"If capitalism worked as advertised, there would be no Marxist dogma, or over regulation."

capitalism is not a cure for stupidity nor for the instincts of the lazy and the totalitarian who would seek to live off the work of others by selling them charlatanry.

marxists attempt to play off differences in income to make a case for equality, but the thing they forget to mention is that rather than making us all middle class, they will make us all poor.

the poor in the US as as well off materially as the middle class of sweden.

all the marxists are doing is demanding to make the rich poor. they don't actually make the poor any better off, they just drag everyone else down to their level and spread poverty rather than alleviate it.

demanding that everyone live in public housing is not the right cure for poverty.

"Do you believe that GE should pay more taxes? You DO understand that taxing corporate income is only a back door way of taxing consumers, right?"

i think what he is saying is that GE should not get numerous tax breaks and vast public subsidies. i would agree in that respect. GE is acting increasingly like a european country and rent seeking by controlling law making.

getting huge subsidies for windmills is also a tax on consumers.

flat taxes for everyone without all this distortionary nepotism seems a better plan.

if he's arguing for a higher corp tax rate, then i'm with you, but that's not the sense i got.

If your neighbor has a $100,000 increase in his or her standard of living (from hard work) and your standard of living increases $100 as a result (from no additional work), some people will give up the $100 to see his or her neighbor lose the $100,000.

it is a commonly repeated experiment in economics. we did this in my experimental econ class as an undergrad using ivy league micro econ students (who could be expected to know better) as subjects.

the simple fact is that most people will chose to be paid $4 if the other guy gets $3 rather than make $5 and have the other guy get $6.

it's a creepily repeatable result.

we think in relative, not absolute terms.

this leads to all manner of bad, beggar thy neighbor tendencies, but it's persistence as a part of human psychology (quite likely driven by biology as we compete for mates relative to those around us) explains the consistent drive of the losers in competition to demand leveling.

just another example of why democracy is such a poor guarantor of liberty as the poor (and lazy) will always seek to vote themselves the wealth of the rich (and industrious). only through inalienable rights can such tyranny of the majority be prevented.

i think most people have a very poor understanding of this fact. they routinely seek to mitigate rights "for the greater good" without realizing that this is the road to tyranny.

"Ha! C'mon now, does anybody here honestly believe, with a straight face, that, "America’s poorest are as rich as India’s richest." Think about that for more than five seconds.

Michael,

Yes, DO think about that for more than 5 seconds. The article states that the bottom 5% of US poor - AS A GROUP - are as well off as the top 5% in India - AS A GROUP. It doesn't mean there are no people in India richer than the poorest people in the US.

"i think what he is saying is that GE should not get numerous tax breaks and vast public subsidies. i would agree in that respect."

And so would I. I don't believe GE should get any special treatment, but I also don't believe any firm should be taxed on its income. Corporate taxes are a cruel joke, the cost of which is ultimately born by all of us as consumers.

"flat taxes for everyone without all this distortionary nepotism seems a better plan."

No, which does change the meaning of the chart. That would explain Mark's comment too. The labels are misleading because the percentile is not world income distribution, but adjusted world income distribution.

Still, I believe that the QoL between US poor and India's rich is not equal. Primarily because quality is based on perception of your surroundings. As morganovich stated, we think in relative terms.

you either have enough to eat, or you don't. you have a house or a TV or a dishwasher or a car or you don't.

i think you are dead wrong about that quality of life.

have you ever been to a really poor country? not jamacia or mexico poor but REALLY poor like sudan poor or a suburb of cairo or mumbai or cape town?

believe me, if you had to live like that you would not feel "middle class" because of your relative position, especially when your children died of or were crippled by easily preventable diseases because you could not afford antibiotics.

the adjustment you mention works in favor of india in this comparison. their per capita GDP is around $1000 in actual US dollars, but, according to the IMF is $3200 at purchasing power parity. so, their income has already been effectively tripled by the adjustment. you describe it like it somehow skews the results against india, but the opposite is true.

being a little less malnourished than your neighbor is not "quality of life."

Morganovich,There is some global poverty line where income either means you live or die, you have enough to eat each day or you are going hungry. I do not disagree with that. I even think that the US poverty line is BS and is just some way for people to justify feeling sorry for themselves.

My point is that the rich in India DO NOT feel sorry for themselves. They have a lot in absolute terms, and they have even more in relative terms. The poor in the US may have the same amount absolutely, but are not as happy with their lives because they are aware of so much more.

"Do you know how many businesses in the U.S. are created every year by immigrants from places like Israel and India?"

Actually Che I know quit a lot about it and the answer is a lot less than you would think. Those who want more cheap foreign labor use this, just as you did, as an argument for more cheap foreign labor. To help their case they exaggerate by using a very low standard to credit a foreigner as the creator of a business. For example if one of six founders of a business was a foreigner then that business is counted as being created by a foreigner. Here are a few examples of business that I have seen listed as such and why the claim is flakey:

Google was started by Larry Page, born in Michigan, educated at Stanford and Sergey Brin, born in Moscow, raised in the USA since age 6, post graduate work at Stanford.

Intel was founded by Robert Noyce, born in Burlington Iowa with an ancestor who came here on the Mayflower, and Gordon Moore born in San Francisco, California. Andrew Grove was not a founder but an early employee. He immigrated to the US as a refugee from the 1956 Hungarian uprising.

EBay was founded by Pierre Omidyar born in Paris France, raised in Washington DC, USA since age 6 and educated at Tufts University.

Yahoo was started by David Filo born in Wisconsin, educated at Stanford and Jerry Yang, born in Taipei, raised in San Jose California since age 8, educated in the USA at Stanford.

Now for the dark side

Companies ruined or almost ruined by foreign labor: 1. Adaptec - Indian CEO Subramanian Sundaresh fired. 2. AIG (signed outsourcing deal in 2007 in Europe with Accenture Indian frauds, collapsed in 2009) 3. AirBus (Qantas plane plunged 650 feet injuring passengers when its computer system written by India disengaged the auto-pilot). 4. Apple - R&D CLOSED in India in 2006. 5. Apple - Foreign guest worker "Helen" Hung Ma caused the disastrous MobileMe product rollout. 6. Australia's National Australia Bank (Outsourced jobs to India in 2007, nationwide ATM and account failure in late 2010). 7. Bell Labs (Arun Netravalli took over, closed, turned into a shopping mall) 8. Boeing Dreamliner ES software (written by HCL, banned by FAA) 9. Bristol-Myers-Squibb (Trade Secrets and documents stolen in U.S. by Indian national guest worker) 10. Caymas - Startup run by Indian CEO, French director of dev, Chinese tech lead. Closed after 5 years of sucking VC out of America. 11. ComAir crew system run by 100% Indian IT workers caused the 12/25/05 U.S. airport shutdown when they used a short int instead of a long int 12. Dell - call center (closed in India because Premji's conmen don't even know how to use telephones, let alone computers) 13. Delta call centers (closed in India because Premji's conmen don't even know how to use telephones, let alone computers) 14. Fannie Mae- Hired large numbers of Indians, had to be bailed out. Indian logic bomb creator found guilty. 15. GM - Was booming in 2006, signed $300 million outsourcing deal with Wipro that same year, went bankrupt 3 years later HSBC ATMs (software taken over by Indians, failed in 2006) 16. Intel Whitefield processor project (cancelled, Indian staff canned) Lehman (Spectramind software bought by Wipro, ruined, trashed by Indian programmers) 17. Microsoft - Employs over 35,000 H-1Bs. Stock used to be $100. Today it's lucky to be over $25. Not to mention that Vista thing. 18. Microsoft - Lian Yang, Microsoft-Contracted Engineer, Arrested in Smuggling Plot After Another FBI Sting in Portland in 2010 19. MIT Media Lab Asia (canceled) 20. PeopleSoft (Taken over by Indians in 2000, collapsed). 21. Qantas - See AirBus above 22. Quark (Alukah Kamar CEO, fired, lost 60% of its customers to Adobe because Indian-written QuarkExpress 6 was a failure)

"They have a lot in absolute terms, and they have even more in relative terms"

the whole point of this is to show that they do NOT have a lot in absolute terms. they have about the same as our poorest 5%.

try living on $6k a year for a family and see if that feels like a lot in absolute terms.

and your "feeling sorry for yourself" metric seems like meaningless supposition to me. beyond a certain point where your basic needs are met, there is very little correlation between income and happiness. lots of very rich people feel sorry for themselves and many poorer ones do not. i think you are just making an unsubstantiated armchair anthropological supposition there. i doubt you can find any evidence to validate it. i think you are making some inferential jumps that are pretty speculative.

don't assume that just because they live in india they don't know how much richer the rest of the world is.

what on earth do you think that post demonstrates? it just seems like a random deluge of bizarrely cherry picked data that supports no general conclusion. what do you think that shows? that some immigrants have been involved in failure or impropriety? so what? far more americans have done so, but neither fact says anything about net impact.

you cannot just point to 4 companies started by americans then a weird smattering of failures by foreigners and claim to have described a whole market. it is both selective data use and logical fallacy.

many of your "examples" (like airbus) are just foolish.

i have spent 15 years as an investor in technology start ups in silicon valley. there is a HUGE indian and asian presence. go have lunch in sunnyvale and see what complexions you see and accents you hear at surrounding tables.

an enormous percentage of valley start ups are created by asians, quite possibly even half which is why so many of the VCs have hired indians and chinese so they can get in on those networks.

Durham, NC -- Immigrant entrepreneurs founded 25.3 percent of the U.S. engineering and technology companies established in the past decade, according to a new study from Duke University. What's more, foreign nationals -- those living in the United States who are not citizens -- contributed to an estimated 24.2 percent of international patent applications in 2006.

The Duke team also did a special analysis of two tech centers -- Silicon Valley, Calif., and Research Triangle Park, N.C.

The researchers found that over half (52.4 percent) of Silicon Valley startups had one or more immigrants as a key founder, compared with the California average of 38.8 percent. A comparison with Saxenian's 1999 findings shows that the percentage of firms with Indian or Chinese founders had increased from 24 percent to 28 percent by 2006. Indian immigrants had also outpaced their Chinese counterparts as founders of engineering and technology companies in Silicon Valley.

Let's use purchasing power parity to adjust the poverty line to $2 US a day. That's somewhere around the 35th percentile mark on this graph. See any Americans at that level? Neither do I. Does that mean there are no impoverished Americans? By absolute standards, yes. By relative standards, I think not.

A person living in the US that makes $6K a year may not have much, but they will not be turned away from a hospital if they are dying. They can get clean water to drink and can often find a shelter or a food bank for a meal. Absolutely richer, still relatively poor.

Don't kid yourself about the QoL of India's wealthy, either. Compared to the rest of India, it would seem luxurious. In fact, they do have TVs, dishwashers and cars (and servants too). The point I see here is that the income drops off quickly and most of the country is below the global mean.

I think this chart is either outdated or doesn't correctly correlate purchasing power, because the middle class in India is comparable to the US. As seen here:http://www.mckinsey.com/mgi/mginews/bigspenders.asp

“an enormous percentage of valley start ups are created by asians, quite possibly even half which is why so many of the VCs have hired indians and chinese so they can get in on those networks.”

The typical Indian startup is a company that brings Indians here in order to develop software specifications to be sent back to India to be programmed. As such their chief impact is to deprive Americans of jobs. Yes there are a lot of them.

If you have examples of firms that do not fit this description do any of them have names?

“you cannot just point to 4 companies started by americans then a weird smattering of failures by foreigners and claim to have described a whole market.”

Fair point, name your company.

”i have spent 15 years as an investor in technology start ups in silicon valley. there is a HUGE indian and asian presence.”

I do not doubt that. The H-1B was started in 1990 allowing 65,000 a year, in 2001, 2002, and 2003 it was bumped to 195,000 just in time for the dot-com bust. Since 2004 it has been limited to 85,000 a year. That adds up to a lot of people. For all practical purposes they do not have to go home ever and about 60 percent are from India. They work cheap and except in very limited circumstances they can displace American workers. There is no labor test for H-1Bs and the prevailing wage requirement has enough loopholes to make them cheap labor. As the Department of Labor put it: “H-1B workers may be hired even when a qualified U.S. worker wants the job, and a U.S. worker can be displaced from the job in favor of the foreign worker.”

”Durham, NC -- Immigrant entrepreneurs founded 25.3 percent of the U.S. engineering and technology companies established in the past decade, according to a new study from Duke University. ”

That is the study I referred to that set a very low bar for a foreigner created firm. It was conducted by Vivek Wadhwa who was born in India and surprise surprise is convinced that American technology can not survive without more Indians coming to this country. When confronted with facts inconsistent with that premise he is quick to play the race card. He also did a study with a wild claim about the number of US patents with foreign nationals listed as inventor or co-inventors. To his credit he later admitted the data was flawed. He also acknowledges that employers us the H-1B as cheap labor (that is why he used them), there is no tech labor shortage in the US, older programmers are spurned by employers who hire young H-1Bs, and recently that American education is better that the rest of the world. Here is how he put it in an article in the Journal of the American Enterprise Institute:

I know from my experience as a tech CEO that H-1Bs are cheaper than domestic hires. Technically, these workers are supposed to be paid a “prevailing wage,” but this mechanism is riddled with loopholes. In the tech world, salaries vary widely based on skill and competence. Yet the prevailing wage concept works on average salaries, so you can hire a superstar for the cost of an average worker.””

I can only say that your xenophobia is astonishing. What point were you attempting to make with that long litany of failures?

You refer to several people who were born in other countries, but have lived in the US since childhood, as foreigners. How long, or how many generations, in your view, must someone live in this country to lose that offending characteristic?

In spite of the objections, I think you are looking at the appropriate statistics now.

It sounds like Buffet was including the taxes the companies pay on employees as the tax rate... but if one is going to do that, it is only fair to look at the corporate taxes that reduced Buffet's income. I suppose it could be done and it would be an interesting analysis, but it is intellectually dishonest to only include one of those, not both.